Wednesday, 31 October 2007

Foreign defence majors are on offset overdrive, their representatives buzzing in and out of India, scrabbling to tie up partnerships with Indian companies. The deadline of 9th June looms, when companies bidding for the Rs 42,000 crore medium fighter contract must submit offsets proposals worth 50% of the contract cost, i.e. about Rs 21,000 crores. Clutching overnight bags and airline tickets to Mumbai, Pune, Bangalore, Chennai and Hyderabad, the offsets managers of the world's biggest arms corporations complain bitterly about two roadblocks that they are all running into: policy paralysis in the Ministry of Defence (MoD), and growing evidence that India's defence industry is unable to handle the deluge of foreign investment that offsets are bringing in.

While the MoD's glacial policymaking is quintessentially Indian, all developing countries that spend heavily on defence have experienced difficulties in absorbing huge offsets inflows. When the UAE --- which mandates 60% offsets, twice India's 30% --- bought large volumes of foreign weaponry in the early 1990s, the offset liabilities were in billions of dollars. Realizing that the defence industry alone could not absorb such inflows, the UAE set up an autonomous body, the UAE Offsets Group (UOG), which was tasked to canalise offsets into developing the emirates' infrastructure.

Operating under a Jordanian expert, Dr Amin Badr El-Din, the UOG emerged as an important body in developing the emirates' infrastructure. Funnelling billions of offsets dollars into the natural gas industry, the UOG masterminded the Dolphin Project, which interlinked gas fields in Qatar, UAE and Oman; there was even a proposal to build a $3.5 billion, 720-mile undersea pipeline bringing gas to India and Pakistan, a project that is now on hold.

This UAE model of coordinating, at the national level, offsets investments into fields unrelated to defence --- "indirect offsets" as they are termed --- has so far been rejected by India's MoD. One reason has been South Block's tendency to see offsets as a panacea for galvanizing its moribund defence production units, which remain tied down by ineffective goal-setting, incompetent managers, and inefficient labour that displays alacrity only in organising itself into powerful unions. A national offsets policy is also threatens to violate jealously guarded turf in more than one ministry. The MoD has its own offsets and the Ministry of Civil Aviation (MoCA) has its own. South Block has already made it clear that it will have nothing to do with the national offsets policy that is currently being drafted.

But pressure is mounting from influential bodies like the US-India Business Council (USIBC), which represents 250 of the biggest US companies that are investing in India. The USIBC has written to the MoD, suggesting that offset investments be allowed into sectors like power generation, highways, airports, ports, urban development, health and sanitation, water and high-technology.

Indian companies, industry bodies like the CII, and consultancies that work in the field of infrastructure echo this argument. Ranbir Saran Das, from Fairwood Consultants, points to the financial logic that he says will make indirect offsets inevitable. By the MoD's reckoning, defence procurements over the next five years will create offsets opportunities between Rs 50,000 to Rs 90,000 crores. This figure, of course, is not the amount that foreign vendors will be obliged to invest in India; it is merely the value of goods and services that the vendor must produce in India during the period that the parent contracts are running. Nevertheless, Das estimates that the incoming investment will create leveraged investment opportunities of anything up to 200,000 crores. He points out that the flagship infrastructure scheme, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), currently gets Rs 1,20,000 crores for a seven-year period; allowing indirect offsets could effectively double its allocation.

If the foreign vendors are proved right and Indian defence industry finds it difficult to set up the joint ventures required for the enormous offset obligations that must be met, the government will have to consider alternative offset mechanisms, including indirect offsets. Implementing these would need a ramped up management framework that could function across multiple ministries.

Instead of the woefully understaffed, single-ministry Defence Offsets Facilitation Agency (DOFA), which currently handles all offsets arising from military procurements, indirect offsets would need to be handled by a nominated nodal ministry, such as the Ministry of Commerce, which could evaluate offset proposals from the perspective of broader national requirements. This apex body could lay down priorities and then negotiate with foreign vendors to tailor the offsets package to the satisfaction of both sides. Working under its directions, the implementation of various offsets could be handled by specialised agencies; offsets in infrastructure, for example, could be coordinated by a multi-disciplinary agency like the Infrastructure Leasing and Finance Corporation (IL&FS).

The catch, of course, is that this would require the MoD and the MoCA to relinquish their control of offsets, something that both see as lucrative cash cows. While the MoD shows no sign of relenting on indirect offsets, the yet-to-be-announced decision (reported earlier in this newspaper) to allow technology transfers (ToT) to be adjusted as offsets is an implicit recognition of the need to create offset options that are easy to implement. The difficulties of setting up dozens of joint ventures with a defence industry that is far from mature cannot simply be ignored.

With just eight months to go for six global defence giants to submit their proposals for offsets in India’s Rs 42,000 crore contract to buy 126 medium multi-role combat aircraft (MMRCA), three senior executives from Northrop Grumman have landed in India this week to firm up partnerships with prospective Indian partners. The tender document places on vendors a 50% offsets liability; that means that each of the six aerospace consortia hoping for the MMRCA contract will need to tie up, before the submission date of 9th June 2008, arrangements to source Indian defence goods or services worth at least Rs 21,000 crores.

The foreign vendors are complaining bitterly. While none of them are willing to come on record for fear of damaging their chances of winning the contract, they point out that India’s domestic defence industry lacks the capacity to absorb so much investment. With foreign companies holdings in Indian defence production units restricted to 26%, each rupee invested by the foreign vendor will require the domestic partner to put in three times that amount.

But with the deadline looming, the Northrop Grumman team will be signing Memoranda of Understanding (MoUs) with a raft of major Indian defence manufacturers. On Tuesday, the Northrop Grumman team will meet with the Tata Group in Delhi, which has set up a special projects division to absorb defence offsets. Ms Uma Pillai, who previously held the secretary level job of financial advisor to the MoD, heads the Tata team.

On Wednesday and Thursday, the Northrop Grumman team will ink defence production MoUs in Mumbai, with Hindalco, L&T, and the Kirloskar and Tata groups. On Friday, they will head to Bangalore, where a MoU will be signed with Hindustan Aeronautics Limited (HAL), India’s major aeronautics manufacturer.

Other MMRCA contenders are signing similar MoUs with Indian defence manufacturers. On Thursday and Friday, the CII is organising an exhibition on offsets in New Delhi. US companies Boeing, Lockheed Martin and Raytheon, Sweden’s Saab International and European giant EADS will be looking to firm up their offsets liabilities. But while MoUs are being signed by each of the vendors with a plethora of Indian suppliers, only those of the winner of the MMRCA supply order will be translated into actual contracts.

Foreign corporations also complain about foot dragging by the government hindering their search for Indian partners. The RBI has taken a year to grant Northrop Grumman a licence to set up a liaison office in Delhi, which started functioning only last month. Several other companies are conducting from overseas their search for offset partners.

While the Northrop Grumman team is focusing on manufacturing tie-ups during this visit, it is in information technology (IT) that foreign vendors say the future of offsets in India lies. During the Aero India 2007 show in Bangalore in February 2007, several foreign aerospace vendors got a head start on offsets for the MMRCA contract, tying up partnerships with Indian IT corporations like TCS, HCL and Satyam, which have built cutting edge expertise in aerospace design. A recent report by Research & Consultancy Outsourcing Services (RNCOS) predicts that the Indian aerospace technology outsourcing market, which is currently at Rs 620 crores, will rise to Rs 4000 crores by 2009. Booz Hamilton projects that by 2020, India’s offshore engineering services market could go up to Rs 12,000 crores.

With defence procurements projected to generate offsets business worth between Rs 50,000 - 90,000 crores over the next five years, the search for Indian partners is gathering momentum.

Tuesday, 9 October 2007

The squalid political shenanigans playing out in Karnataka should cause no surprise. That’s politics for you, even in democracies like France, Italy and the United States, which consider themselves “developed”. But in all those countries, citizens can swallow their disgust for the politicians, look away (note the western trend of falling numbers of voters) and get on with their well-ordered lives. Not so in India, where the rot has spread --- seeping downwards or upwards, nobody really knows --- until the disregard of ethics has gridlocked almost every avenue of life.

All that the common man demands is some order in his existence, the implementation of a set of customs and laws. This is not unreasonable; the social contract envisaged by Hobbes, Locke and Rousseau involved citizens surrendering certain freedoms to the state (enjoyable pastimes like pillage and plunder) in exchange for law, order and peace. The alternative to that, said Hobbes, was what many Indians believe already plays out in the fabric of life in this country: “a war of every man against every man”.

The signs all indicate a breakdown of order. From growing public lynchings in Bihar and Uttar Pradesh, to areas in the north-east where the only order is that imposed by armed groups; from the roads of Delhi where speeding buses mow down pedestrians who themselves violate rules by spilling onto the road; from the growing acceptance of fake encounters in place of building a case and obtaining a conviction; from the experience of citizens who are forced to pay bribes to lodge a report with the guardians of our law. Across the country, the state enforcement machinery has abdicated its end of the social contract. Ask the aam aadmi across India and he will unhesitatingly tell you: his biggest problem is clothed in khaki, not khadi.

If verification is required of the disarray in the police, take a look at the week’s news headlines. The Prime Minister has urged police reforms, warning of growing public disillusionment. An inquiry in UP is turning up concrete proof of what everyone knows to be standard practice: the corrupt recruitment of thousands of policepersons. In West Bengal, there is growing conviction that the Kolkata Police stage-managed the murder of Rizwan-ur-Rehman, allegedly at the instance of an industrialist, whose daughter Rizwan had the gumption to marry.

But it is the police’s failure at internal security that causes, perhaps, the greatest concern. Last week Dr Manmohan Singh all but pointed out that police failure at internal security was negating the armed forces’ success at safeguarding the borders. Police investigations have still to unearth the culprits in a string of bombings from the Samjhauta Express to Hyderabad. The doctor pronounced a simple prescription: “greater discipline, lesser politicisation and zero corruption.”

Interestingly, two out of the PM’s three prescriptions must be driven from within the police; this is a simple matter of leadership. But with the senior police leadership unwilling to step up to the plate, they have passed the buck to the National Police Mission, which has been tasked to “develop a culture of excellence” within the police. This is abdication of responsibility; only direct leadership by police officers can build an ethos of achievement amongst India’s 13.4 lakh policepersons, a force larger than the Indian Army, which consumes an annual budget of Rs 20,000 crores. But police officers, bred in a culture of sycophancy and corruption, change nothing; nobody holds them to account.

Take the example of Delhi, which boasts of the world’s biggest metropolitan force of 60,000 policemen, on each of whom the government spends Rs 2.4 lakh rupees a year. There are 36 policemen for every square kilometre of the city, but what they achieve remains a mystery. Driving through the city, one is assailed by the sight of rules being violated every minute of the day --- straight-ahead lanes are blocked by cars turning right, red lights are run, zebra crossings are parked upon --- but the policemen, like Gandhi’s monkeys, see no evil.

The khaki-clad officers, meanwhile, remain ensconced in their offices. Unlike their counterparts in the armed forces, there is no tradition of going around their areas of responsibility and overseeing, first hand, the functioning of their subordinates. Army battalion commanders are sacked without ado for the ineffectiveness of their subordinates. But, in the police, as long as the bosses are kept happy and political wires are not being crossed, promotions and postings flow in smoothly.

Making policing effective is a matter of vital strategic concern for India. Economic progress, societal stability, and the rule of law are inextricably linked with policing. The conduct of a country’s politicians, the delivery of governance, the conditions for citizens to work productively, the smooth utilisation of infrastructure and an effective framework for economic activity --- all these are essential for development. None materialise without being policed effectively.

India cannot afford any longer to blame police ineffectiveness on some nebulous systemic failure. Police officers must be called to account and police reforms must find a way to hold them answerable for what happens under their charge. There have always been honest police officers who would respond to such a change, but as the culture of corruption spreads, the numbers are dwindling.

Monday, 8 October 2007

Any book emblazoned with the banner, “A New York Times bestseller”, and prefaced with three pages of gushing reviews should be approached by the sensible with a degree of caution. But after a few wary pages of “Three Cups of Tea”, even the cynical would lower their guard and grudgingly admit that they’ve been caught up in the story of Greg Mortenson, an American climber, who staggered down from an unsuccessful attempt on Mount K-2, to a remote Balti village that was to become the focus of his life. Over the next ten years, Mortensen devoted himself to building a series of schools across Pakistan’s Northern Areas, or Gilgit-Baltistan, a region that education had barely touched.

In the unstoppable way that Americans go about the things that they are convinced about, Mortenson painfully overcame a chronic shortage of funds, the logistical difficulties in an area that even Islamabad wasn’t keen to develop, and wariness, even animosity, from fundamentalists, both local and in the US, who spat fire at him after 9/11 for “helping the Muslims”.

This is a readable, rousing saga about an underdog who makes good, co-authored (Relin wrote the story; Mortenson lived it) by a journalist who makes no pretence of objectivity. Relin was just one of many in his wide-eyed admiration of Mortenson. Another journalist who came to Gilgit to report from the Pakisani side on the Siachen conflict, Kevin Fedarko, diverted himself to Mortenson’s mission after an hour with him in a school in Baltistan. Fedarko explains, “At that moment, for the first time in sixteen years of working as a journalist, I lost all objectivity. I told Greg (Mortenson), ‘What you’re doing here is a much more important story than the one I’ve come to report. I have to find some way to tell it.’”

Fedarko’s report, headlined in 34 million copies of Parade magazine on the 6th of April 2003, illustrated the irony of Mortenson’s mission. While US forces massed outside Baghdad for their final push into the Iraqi capital, and into the Muslim consciousness as a hate figure, Mortenson’s story in Parade, entitled, “He fights terror with books”, brought into the American limelight an alternative way of doing things.

In contrast to the allegorical Ugly American, Greg Mortenson is easy to like. There’s a genuine respect for Balti culture, which stems perhaps from climbing with Balti porters in the high Karakoram; many Everest climbers display the same sentimentality towards Sherpas. But where Mortenson goes beyond others is in walking the talk; in physically living in the region, learning the language, and eventually being adopted by a Balti family.

Despite veering towards hagiography in describing “Girig Sahib’s” mission of mercy in Baltistan, the book is on surer, and more nuanced, ground in painting a portrait of an American completely out of tune with the mood in his own country. Mortenson’s girlfriend, Marina, who grew increasingly irritated at having to live with him in the backseat of La Bamba, his old Buick, because he didn’t want an apartment to eat up dollars that could be better spent on a school roof; military officers clutching files and looking down at their shoes as they walked through the Pentagon, unaware of the emotions amongst the civilians they were bombing; the Ray-Ban-wearing intelligence agents in the US embassy in Kathmandu who interrogated Mortenson about where Osama was holed up, and how many of his schoolchildren had parents who were extremists. From this maelstrom of madness, Mortenson finds refuge in the simplicity and gratitude of the people he brings education to. And in doing so he discovers a meaning to his existence.

Mortenson’s story is compelling enough for the book to have been left at that. But in its closing stages someone (Publisher? Editor? Co-author? I hope not Mortenson!) seems to have decided to sex up the dossier. And so, days after the Taliban was driven out of Kabul, a heroic Mortenson drives through the Khyber Pass, into Jalalabad, and on to Kabul. This part of the book is an syrupy mixture of Afghan clichés and outright fiction. The Spin Ghar hotel in Jalalabad, which was untouched by bombing, is likened to Dresden in the Second World War; Kabul, which was an oasis of peace, is described as echoing with gunfire; and the Intercontinental Hotel, half of which is described as having been reduced to rubble, actually never received a single bomb. This attempt to embellish detracts from the larger story.

In the final balance, Three Cups of Tea is a well-produced, attractive paperback that is worth a read, especially for those with a cultural understanding of Pakistan and the issues around Kashmir.

Friday, 5 October 2007

Unexpected speed bumps threaten to disrupt India’s defence offsets programme, through which the Ministry of Defence (MoD) hopes to generate Rs 60,000-84,000 crores worth of business in India’s defence industry via foreign investment. This newspaper has already reported how two top managers of the offsets programme have been changed at a crucial time. Now Business Standard has learned that India’s first ever offsets deal, which involves Israeli defence major ELTA in partnership with Indian private companies L&T and Astra Microwave, is in trouble.

Top MoD officials, speaking on condition of anonymity, have told Business Standard that the Central Vigilance Commission (CVC) is scrutinising the deal for ELTA to supply radars to the air force. After a series of raids early this year on businessmen associated with Israeli defence companies, the MoD has played it safe by referring the ELTA deal to the CVC. For over six months now, the CVC has held on to the file. As a result, a year after the Defence Offsets Policy was spelled out, not a single offsets agreement has been finalised.

Foreign aerospace majors, which must submit by 9th June their offsets proposals for the Rs 42,000 crores contract for supplying Medium Multi-role Combat Aircraft (MMRCA), are carefully watching the ELTA deal, as an indicator of how India’s offsets programme will play out. There is little to reassure them; with the parent deal under scrutiny, the offsets agreements with Astra Microwave and L&T are also in limbo.

This is also the case with two other contracts that are considered test cases for the offsets programme. The Rs 2,200 crore deal for 197 multipurpose helicopters, finalised after years of testing and negotiation with EADS subsidiary, Eurocopter, is being reviewed after objections from rival company, Bell Helicopters. Meanwhile Eurocopter and its offsets partner, Hindustan Aeronautics Limited (HAL), can only wait. And in the proposed Rs 4,000 crore purchase of six C-130J Hercules aircraft, the MoD has still to clarify whether offsets will apply at all for this government-to-government agreement.

Adding to the apprehension amongst vendors is South Block’s delay in clarifying major policy issues relating to offsets. The MoD has verbally assured foreign military vendors that it will permit “offsets banking”. This would allow vendors to go ahead with setting up partnerships with Indian companies, with the assurance that the business generated would be credited as offsets for future defence contracts. But the MoD has held back on a formal announcement.

The MoD has also verbally indicated that it will allow foreign vendors to count technology transfers to Indian manufacturers as offsets. But this too has not been formally announced.

Dr Kiran Chadha, who headed the Defence Offsets Facilitation Agency (DOFA) until 1st October 07, explains that finalising the policy has taken time because there was no expertise on offsets within the MoD. Since these issues were being confronted for the first time, the MoD took time making sure there were no loopholes in its policy. She confirms that DOFA has now finalised its recommendations.

There is, however, another delay because Defence Minister AK Antony does not wish to announce frequent and piecemeal changes to the Defence Offsets Policy, which was spelt out just a year ago. According to Dr Kiran Chadha, “the Defence Minister will himself announce all the policy changes, in one go. This will most probably happen before the end of the financial year, that is 31st March 2008.”

The offsets policy mandates that every foreign defence contract worth Rs 300 crores or more obliges the foreign vendor to plough back at least 30% of the contract value as offsets, which are co-production or purchase agreements with Indian defence producers.

Tuesday, 2 October 2007

In a move that has taken foreign and domestic arms vendors by surprise, the head of the Ministry of Defence's (MoD's) high-profile Defence Offsets Facilitation Agency (DOFA), Dr Kiran Chadha, has been prematurely moved out. Exactly a year after DOFA was set up in Oct 2006, the joint secretary who was promoted to head it and play a pivotal role in the evolution of a new Defence Offsets Policy, has been transferred to the Ministry of Women and Child Development (MoWCD). The transfer order is likely to be served today, on 1st October.

This blow to continuity within DOFA seems likely to be followed by more. The incoming head of DOFA, Mr Chaman Kumar, has just one year left in the five-year tenure that civil servants are authorised in Delhi. He is being shifted to DOFA after reportedly having run afoul of his present boss, Minister for Women and Child Development, Renuka Chowdhury. According to service rules Mr Chaman Kumar is due to be posted out of Delhi in mid-2008.

The MoD has repeatedly stated that the development of India's domestic arms industry hinges on successfully implementing a Defence Offsets Policy. The policy framework was laid out in the Defence Procurement Policy 2006 (DPP-2006), which mandated that all foreign vendors must plough back at least 30% of the value of any defence contract they conclude with India. However, important components of the policy are still being worked out, a process being spearheaded by the DOFA.

Two months ago, another secretary level official, vitally involved in offset policy, the Director General of Acquisitions, Mr Shilabhadra Banerjee, was transferred out of the MoD. The Secretary Defence Production, Mr KP Singh, who heads the process, will be retiring later this year.

Dr Kiran Chadha is learned to have represented against her premature posting to the Cabinet Secretary. Postings of senior IAS officials are handled by the Department of Personnel and Training (DoPT) and cleared by the Appointments Committee of the Cabinet. Her representation terms her posting as "illegal" and an "arbitrary move" and points out that the DoPT, in a separate Right to Information case, revealed that her tenure with the MoD was to continue till October 2010.

The DOFA chief's transfer has raised eyebrows amongst the majority of foreign arms vendors, many of which have set up office in India in order to liaise with DOFA and to finalise offset agreements with Indian defence manufacturers. Several key decisions regarding offsets policy, such as the permissibility of "offset banking", are still awaited and vendors believe these changes in DOFA could delay those further.

The country head of the European Aeronautic Defence and Space Company, or EADS, Stefan Billep, points out that it took time to develop a working relationship with the DOFA head. Praising Dr Chadha, Mr Billep said, "The DOFA chief was very proactive, and she always had an open ear to listen to us. We eventually reached a good rapport."

MoD sources, who wish to remain anonymous, suggest that Dr Chadha was moved out because the powerful Indian Administrative Service (IAS) lobby was not pleased to see an officer from the Central Secretariat Service, which is Dr Chadha's parent service, enjoy the high profile which attended the DOFA head. The three ministers in the MoD, Mr AK Antony, MM Pallam Raju and Rao Inderjit Singh, are all believed to have supported the continuation of the outgoing DOFA head.

The change is likely to go ahead on Monday. The new head of DOFA, Mr Chaman Kumar, is an IAS officer.